Crafting the Offer
When you find the home that’s right for you, it’s time to put together an offer to purchase the property.
Real estate agents craft offers and negotiate contracts every month. Your opinion and gut are important here, but carefully consider their input and suggestions. It’s ultimately up to you to determine where that first offer begins.
Here are a few broad considerations to bear in mind:
Due Diligence Done?
Make sure you’ve done your homework. Verify the school information, property boundary lines and more. Visit the home and the neighborhood at different times of day. Scour local news sources and talk with your real estate agent or local officials regarding any pending changes to or near the property. You don’t want to find out after closing that a factory or a four-lane highway is going up nearby.
See what your agent can learn about the seller’s motivations. Are they looking to sell because of that incoming factory or four-lane highway? Or maybe they’re taking a new job and are desperate to unload the property. Other homeowners may be in no hurry and focused on getting the best possible offer. Getting insight into the seller’s mindset and motivation can help strengthen your negotiating position.
Take a Close Look at “Comps”
Before making an offer, you’ll want to compare the sales prices of similar homes. Your real estate agent will handle the number crunching and prepare a “Comparative Market Analysis” (CMA). The CMA compares and contrasts the characteristics and sales prices of similar homes. It’s an educated estimate of the fair market value of your future home and a great tool for picking a starting point for negotiations. Also look at how long the property has been on the market and what the sellers paid for it originally.
Start Where it Makes Sense
You’ve already determined how much you want to spend on a home. Protect your financial future by sticking to this figure. Keep in mind that a first offer is seldom accepted, so you’ll want to leave some wiggle room between your initial offer and your total housing budget. Rely on your agent’s guidance and make a first offer that makes sense. You don’t want to overpay for the home, but you also don’t want to start with a lowball offer that poisons the negotiating environment.
Include Earnest Money
To show that you’re a serious buyer, it’s a good idea (and a legal requirement in some places) to include a deposit with your offer. This deposit is known as “earnest money” and can be refunded to you if you walk away from the sale (within the terms of your contract). Ask your real estate agent for advice on how much earnest money you should put down. Some agents suggest depositing a small percentage of the sales price, while others recommend a flat amount ranging from $500 to $2,000.
Protect Yourself With Contingencies
VA buyers are required to have an appraisal. But that doesn’t give you the same insight and protection as a home inspection. Make your purchase contingent on the results of a home inspection. These can reveal all sorts of costly problems, and you can use the results of the inspection to renegotiate with the seller or even walk away from the deal. Veterans and military members who currently own a home may want to add a home sale contingency that makes the new purchase contingent upon their ability to sell their old home.
Purchase Offer Specifics
A purchase offer will feature your stipulations and contingencies. This is your way of saying, “I want to buy this house, but only if X, Y and Z happen.” Your agent will have a good handle on what contingencies and specific requests you should include.
Some of the most common stipulations and contingencies include:
- Purchase price: You detail to the exact dollar what you’ll pay for the home.
- Financing terms: Contracts will typically include a clause that says your purchase is contingent on you obtaining a loan within a specific window of time, often 30 or 45 days. Exceeding this timeframe can open the door to a contract cancellation. A financing contingency can help protect your earnest money in the event you're ultimately unable to land a home loan. Most VA loans close in 30 to 45 days, which is comparable to both conventional and FHA financing. Talk with your loan officer about the financing contingency window before making an offer.
- Closing date: You’ll spell out the day you would like to close on the loan and take possession of the home. It’s tempting to push for a quick closing, but it’s a good idea to allow a cushion for delays or other issues. The most important thing is to set a date that’s realistic. Also, be on the lookout for contract provisions that allow the sellers to charge a daily fee for delays in closing. Remember, too, that when your contract “expires” or reaches the agreed-upon close date, the seller is not obligated to grant an extension.
- Window to respond: Some purchase offers will require sellers to respond within a certain period of time, otherwise the offer is void. You don’t want to be left hanging for days while other properties come on and off the market. This also helps avoid a scenario where a seller uses your offer as a bargaining chip.
- Home inspection: Most buyers want to make the purchase contingent on the results of a home inspection. Don’t make the mistake of skipping an inspection to save money. A professional home inspection can reveal all sorts of costly problems that you will be unable to detect.
- Existing home sale: Veterans and military members who currently own a home may want to make their new purchase contingent upon their ability to sell their old home.
- Earnest money protection: Homebuyers will typically include a clause that requires the return of their earnest money in the event the home inspection turns up problems, financing falls through or some other unforeseen issue beyond their control occurs. VA loans automatically protect a buyer’s earnest money if they walk away from a deal because the appraised value comes in below the purchase price (it’s called the VA Amendment to Contract).
- Seller to pay closing costs: A seller will often agree to pay some or all of a buyer’s closing costs. Closing costs are the costs and fees associated with originating and finalizing your loan. Don’t be shy – this is one of the most common contract contingencies, and it can save you from having to come up with cash at closing. On a VA purchase, buyers can ask a seller to pay all of their mortgage-related closing costs and up to 4 percent of the purchase price in concessions, which can cover things like prepaid taxes and insurance, paying off a buyer’s collections or judgments and more.
Next, we’ll take a closer look at closing costs.